Glossary

Insurance

What is insurance?

Insurance is a policy paid for by an individual, a business, or another entity intended to protect the insured against financial loss. Because the cost of coverage is contingent on the risk profile of the insured, insurers may offer policyholders stronger coverage in return for a higher premium. Almost everyone in the U.S. has some form of insurance, such as health or car insurance. Less common forms are specific to the insured’s business needs or geographical location.

Deeper definition

The vast majority of Americans will need insurance at some point in their lives. The cost of an unanticipated financial liability is simply too high for the average American to shoulder alone, and most deem the relatively smaller premium a fair exchange for coverage. For a business, insurance allows the insured to factor its risks into the cost of doing business while betting that a given loss won’t hurt its profitability.

An insurance policy can be purchased against any number of potential hazards. Homeowners who live near areas prone to flooding may take out flood insurance just as those who live near fault lines may consider earthquake insurance. Those who live in crime-ridden areas often insure their personal property with a policy tailored to whether they rent or buy.

Common types of insurance can fall into various categories:

Health insurance: the insurance company agrees to pay the medical costs of the insured, although out-of-pocket expenses like copays or deductibles must still be paid by the policyholder.

Life insurance: when the insured dies, a contractual sum is paid to to his or her designated survivors. If the policy is meant to protect only against the potential for violent crime, it is called casualty insurance.

Liability insurance: often featured as part of a larger insurance policy, in order to protect the insured from legal claims against him or her, payment is expected to go to the claimant and not the policyholder.

Car insurance: protects against damage to the insured’s vehicle or medical expenses incurred after a collision.

Property insurance: coverage for risks to property of any kind, including your home or the things you own, and even includes such policies as crop insurance, which a farmer may purchase in case of bad weather, or aviation insurance, which can cover both damage done to and done by an aircraft.

Insurance example

Stanley is afraid to fly to the U.K. to visit his friends. He takes out a life insurance policy so that, in the event of his very unlikely demise by plane crash, his wife and children won’t be entirely on the hook for the costs of his funeral and the loss of his income. Before his flight, he has a terrible anxiety attack, but he is delighted to receive medical treatment at a highly reduced rate, thanks to the premium he pays every month for his health insurance. He decides to skip his flight altogether, but, knowing his fear of flying, he had taken out travel insurance and his policy covered cancellations, so he enjoyed a small reimbursement.

Other Insurance Terms

What is gross profit margin? Gross profit margin, also referred to as gross margin, is a measure of a company’s profitability. Gross profit margin indicates the amount of revenue remaining in a given accounting period after a company pays for labor and materials, otherwise known as cost of goods sold (COGS). Deeper definition A company’s gross […]